Algo trading set to take China by storm

Algorithmic trading will account for 2.5% of securities trading in China by 2013, up from 0.6% in 2011, according to a new report by financial research firm Celent.

The report noted that stock index futures were currently the most actively traded instrument via algorithms. Conversely, A-shares – Renmembi-denominated securities of mainland China-based companies, only available to mainland citizens and Qualified Foreign Institutional Investors (QFIIs) – had seen only minimal algo penetration.

Celent predicts hedge funds and securities firms were likely to be the main customers for algo trading between now and 2013, with market data services also seeing considerable growth to support algorithmic as well as high-frequency trading.

According to the research house, the development pace and scale of algorithmic trading in the futures market – especially in equities index futures – will far exceed that of the equities market.

Citing the activity of trading technology vendors such as Hudson Technologies, SunGard, TradeBlazer, Webstock and Tinysoft, Celent said Chinese firms had begun to develop algo trading systems in collaboration with foreign vendors and financial institutions. Such solutions were often specifically designed to overcome the complexities of trading in China, where the average market impact cost is estimated to be 13 basis points higher than the global average.

In addition, China has a smaller proportion of institutional investors, high price fluctuation in a single day, regulatory restriction on the level of price fluctuation, relatively few market makers, a greater percentage of retail investors, and more data delay, says the report.

“Algorithms used in Europe and the US cannot be directly applied to China,” said Hua Zhang, analyst with Celent’s Asian financial services group and author of the report. “Modifications and localisation are required. The main differences with these markets include order speed, market data speed, and China’s unique trading system.”